The days of heroic Australian films celebrating the settlers coming to terms with their mysterious new land and discovering a national identity – Picnic at Hanging Rock, Gallipoli, The Chant of Jimmy Blacksmith – are long past. That old spirit is only to be found now in hollow, self-mocking form in Baz Luhrmann's camp epic, Australia.

Current films are more concerned with exploring the fringes or the underside of down under. Earlier this year some of the country's best actors appeared in the remarkable Animal Kingdom, a psychological story loosely based on fact about a Melbourne family involved in armed robbery, drugs and large-scale larceny. They're unromantic descendants of the Kelly gang, people to whom crime has been a way of life for several generations.

With the same gifted cinematographer Adam Arkapaw helping to turn a jaundiced eye on the low-life scene, the riveting Snowtown takes us further west to recreate in South Australia one of the most outrageous series of murders ever to hit the nation. The only professional actor involved this time is Daniel Henshall, who gives a bravura performances as the demonic protagonist. The rest of the cast are locals looking like and playing people much like themselves, and they're directed with great skill by Justin Kurzel, making his feature debut.

The killings (12 in all) occurred in the 1990s and were the subject of a protracted trial that resulted in four men being jailed for life. They became known collectively as the Bodies in Barrels murders for the circumstances in which a number of the victims were discovered in 1999 in a disused bank at Snowtown, some 100 miles north of the state's elegant capital, Adelaide. But only one of the murders actually took place there. The others occurred in and around the dreary suburb of Salisbury North where Adelaide drifts into the flat, empty outback.

As presented in the film, Salisbury North is a jerry-built sink estate of squalid, one-storey homes where a population of boozy, chain-smoking derelicts eat junk food and live lives of quiet (and sometimes noisy) desperation as their children, when not playing video games, rush around in the neglected streets doing battle in shopping trolleys or on bikes. Into this anomic world comes John Bunting (Henshall), a bearded drifter with sparkling eyes and a cheap, seductive charm, who has an energy and apparent purpose conspicuously lacking in the community.

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Bunting is gradually revealed as a manipulative, homophobic, homicidal psychopath but is introduced as a bringer of vitality and organisation. He is seen largely from the point of view of the passive, dough-faced, 16-year-old Jamie Vlassakis (Lucas Pittaway) who lives with his depressed mother, Elizabeth, and two half-brothers. Bunting starts cooking proper meals for Elizabeth's family and tidying the place up, but his first major social act is to organise a campaign against a paedophile who's been taking naked photographs of Jamie and his brothers and probably abusing them as well. Elizabeth has phoned the police, who've come around, arrested the man and immediately released him on bail. It's a characteristically official response to an area the authorities have apparently given up on. Bunting energises Jamie into throwing ice-cream cones at the offender's house, painting graffiti and then, in a gruesome scene, dumping the crushed heads and innards of kangaroos on the doorstep. The man moves out.

Jamie has found a role model, though precisely the one he doesn't need. The locals have discovered a leader of sorts to feed their vicious resentments and prejudices, and the camera works close in on groups of drinkers and talkers as they gather to vent their prejudices around kitchen tables. From then on there is an ugly escalation as Bunting and a pair of quietly lethal adult conspirators set about what seems like a moral cleansing of pederasts, drug addicts and transvestites, though the pretexts are often dubious. Their actions are scarcely concealed, but the victims' bodies disappear and their absence goes unreported.

Bunting is an odd, somewhat anomalous serial killer: he doesn't work alone, has no consistent modus operandi and deliberately draws others into his scheme. It's as if his role as leader were an essential part of the procedure and we know that early on in his career he was a neo-Nazi.

The sad Jamie (the director elicits a subtly convincing performance from Pittaway) is turned into a killer by being forced to shoot a dog at point-blank range and made complicit in one of the most appalling murders. The victim is his half-brother, who rapes him while a cricket commentary goes on sedately on TV in an adjoining room, a terrible image of two sides of Australia violently conjoined. In another remarkable scene we see a prospective victim feeding a mouse to a Queensland python. Jamie subsequently becomes Bunting's agent, eventually luring another member of his own family to his death.

Snowtown involves the audience more by making us struggle to hear what people are saying and to interpret what they are doing rather than by what we're actually shown. It's a truly shocking experience that ends suddenly, just when we're expecting a final atrocity and some climactic revelation, and we're left to ponder the events. I was reminded of a book I once read called Crime and Punishment:50 Crimes That Shocked Australia, in which the author, Alan Sharpe, ends his introduction by saying: "Readers seeking morbid sensationalism for its own sake might be disappointed here. The emphasis is on motive rather than misery, on method rather than mayhem and on the vagaries of the human condition."